Franchising can be one of the most rewarding paths to take when expanding a business. However, owing to the fact that you will be sharing the same “business space” with other individuals, a legal framework was designed to keep people both accountable and prevent them from stepping on each other’s financial toes. In Australia, franchising is legally governed by the Franchising Code of Conduct (often referred to as “The Code”). This is a mandatory industry code that regulates the conduct of the participants of franchising agreements towards each other, all over Australia.
Before getting any further in this discussion, it is of paramount importance that you understand what comprises a franchise agreement. This has been outlined in clause 5 of the Franchise Code, which states that a franchise agreement is a written, oral or implied agreement in which the franchisor grants to the franchisee the right to carry on the business of offering, supplying or distributing goods or services in Australia. The system and marketing plan under which the franchisee works is substantially determined, controlled or suggested by the franchisor. Under this agreement, the operation of the business is also associated with a trademark or a commercial symbol owned, used or licensed by the franchisor or an associate of the franchisor.
The code additionally states that before starting or continuing the business, the franchisee must pay or agree to pay, to the franchisor, an amount which may include:
- An initial capital investment fee
- A payment for goods or services
- A fee based on a percentage of gross or net income
- Franchise service fee
- A training fee or training school fee
The payment however does not include:
- Payment for goods and services supplied on a genuine wholesale basis
- Repayment by the franchisee of a loan from the franchisor or an associate of the franchisor
- Payment of market value for purchase or lease of real property, fixtures, equipment or supplies needed to start or to continue business under the franchise agreement.
The franchising code in Australia has been in practice since 1 October 1998 and was only later amended on 1 January 2015, and the amended version replaced the old one. This code is regulated by the Australian Consumer and Competition Commission (ACCC), and thus any breach of the code is usually investigated by the government agency. The ACCC can then mediate the conflict or, in cases in which no conclusion is reached, can refer the case to the courts.
Individuals can also take matters of alleged breach of the code to court without going through the ACCC. It is worth noting that the amended codes do not apply to franchise agreements formed before 1 January 2015. However, any agreement that is formed or renewed after the amendment date is subject to all the codes in the new code.
Another body of importance when it comes to franchising in Australia is the Franchising Council of Australia (FCA). Though it is not mandatory to be a member of the FCA, it is recommended for most franchise partners to join the body. This is because it offers good resources and education on franchising, as well as provision of credibility to franchisors and franchisees alike. The FCA has its own ethical standards and a memorandum that its members adhere to.
Beyond the Franchising Code of Conduct, participants are also obligated to comply with Australian consumer laws dictated by the Australian Competition and Consumers Act 2010. The act addresses issues such as the good faith obligation and not engaging in third line forcing. Other pieces of legislation that apply to franchisors and franchisees include:
- The Fair Work Act
- The Australian Securities and Investments Act
- Australia’s tax laws
It is worth consulting a reputable franchise lawyer in order to fully understand your rights, responsibilities and obligations in a franchise agreement, whether you are a franchisor and a franchisee. Seeking advice from a professional in the specific fields that seem to be spurring conflict between you and your partner(s) so as to fully understand the scope of all the above.
Understanding the Franchising Code of Conduct and all other pertinent legislation will allow for you to make the most of your franchising agreement while sidestepping legal issues that will cost you time, energy and finances. Contact Franchise Legal on 1300 798 501 to consult a reliable franchising lawyer in Sydney.